The Economic and Political Outlook. By Roger Bootle

Transcription

1 The Economic and Political Outlook By Roger Bootle

2 1. Agenda The World, China and America. Recovery in the euro-zone. Political worries in Europe. The UK economy. Brexit opportunities and challenges. The political situation in the UK.

3 2. World economy recovering? The US and UK remain robust. Hard-hit Russia and Brazil have stabilised. Many emerging markets recovering. Even the euro-zone to show decent growth this year. Why the apparent global recovery? The benefits of lower oil prices coming through. Gradual recovery from the financial crisis. Fiscal austerity coming to an end.

4 3. Global GDP Growth (% y/y) ( ) (Latest = 2016) CE Forecasts Sources: Thomson Reuters, Capital Economics -1

5 4. Popularity of Google Searches for China Slowdown ( ) (Latest = May 17) 80 Index scaled to range Source: Google Trends

6 5. China Growth (%y/y) ( ) (Latest = Q1 17) 16 Official GDP 14 CE China Activity Proxy (quarterly average) CE forecasts Sources: CEIC, Capital Economics 2

7 6. China Growth Scenarios (CE Activity Proxy, %y/y) ( ) CE Forecasts With Reform Without Reform Sources: CEIC, Capital Economics

8 7. The Party Congress The 19th National Congress of the Communist Party of China is due in Oct. or Nov. Will include a significant leadership reshuffle Policymakers will want to avoid financial market volatility or signs of economic weakness during meeting. Might Xi embrace difficult reforms if he has more supporters in leadership?

9 8. Where EMs Sit in the Economic Cycle Poland, Hungary Taiwan Growth peaking Korea India China Romania Mexico, Indonesia Turkey Egypt Colombia Nigeria Brazil Russia S. Africa, Chile, S. Arabia Growth bottoming out Source: Capital Economics

10 US GDP (% q/q Ann.) ( ) (Latest = Q1 17) CE Forecasts Sources: Thomson Reuters, Capital Economics

11 10. US Fiscal Policy Fiscal stimulus 1% of GDP per year? Lower corporate/personal income tax rates. No big boost to infrastructure spending. Stimulus when economy at full employment.

12 11. US Monetary Policy Another 75bp of tightening this year. Fed funds rate 1.50% to 1.75% by end Rate to peak at 2.75% to 3.00% in 2019 H1. Balance sheet normalisation.

13 12. CE Key US Macro Forecasts f 2018f 2019f GDP (%y/y) Unemployment (%) CPI Inflation (%) Fed Funds Rate (%)

14 13. Selected Euro-zone Countries GDP Forecasts (%y/y, 2017) Source: Capital Economics

15 14. Key Euro-zone Forecasts (%y/y, unless stated) f 2018f 2019f GDP Germany France Italy HICP Inflation ECB Main Refi. Rate (%) Sources: Thomson Reuters, Capital Economics

16 15. GDP in the Euro-zone ( ) (2008 = 100) (Latest = Q1 2017) 110 Germany France 110 Spain Portugal 105 Italy UK Source: Thomson Reuters

17 16. GDP in the Euro-zone and UK ( ) (1999 = 100) (Latest = Q1 2017) 150 Germany France Spain Portugal Italy UK Source: Thomson Reuters

18 17. April Eurobarometer: Is EU Membership a Good Thing? (%) Source: European Commission

19 18. Polling for the Next Italian General Election (% support) M5S Forza Italia Democratic Party Liga Nord Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Source: Various Opinion Polls

20 UK GDP (%q/q) (Q1 Q1 2017) Out-turn HMT shock scenario HMT severe shock scenario Q Q Q Q Q Sources: Thomson Reuters, HMT

21 20. UK GDP (% y/y) ( ) (Latest = 2016) 4 3 CE F'cast Sources: Thomson Reuters, Capital Economics

22 21. Key issues about leaving the EU The US, China et al are not in the Single Market. The Single Market doesn t really extend to services. The UK would ideally like tariff-free access. But wants to drop the CET (and the CAP). And wants the freedom to do trade deals. The EU is a bad negotiator of trade deals. Importance of tariffs and deals over-estimated. The EU is fading in relative importance

23 22. EU s Average Tariff On Manufactured Goods (%) ( ) Source: World Bank

24 23. Four Scenarios for EU/UK Trade Tariff-free trade between EU and UK trade as before, minimal impact on either area. Tariffs on both sides and the UK maintains tariffs on ROW. Trade between EU/UK falls. Tariffs on both sides but the UK negotiates FTAs with ROW. UK unilateral free trade (UFT) zero tariffs on imports from anywhere.

25 24. Unilateral Free Trade Hong Kong and Singapore have done it. Britain did it in the 19 th century. Cuts through the nonsense and delays involved in negotiating trade deals. It would bring a big reduction in the UK price level, affecting all suppliers to the UK.

26 25. Do We Need Trade Agreements? You don t need FTAs to trade. But you do need Mutual Recognition Agreements (MRAs). Registering as an Authorised Economic Operator (AEO). You don t need to be in the single market to operate cross- border supply chains. NAFTA and others. UFT would help UK producers to maintain crossborder supply chains.

27 26. The City Perspective Some jobs to leave because of passporting. But probably comparatively few. The advantages of London are enormous. Outside the EU, the UK is outside its regulations. The balance of the City s business is set to move away from Europe.

28 The May factor. 27. UK Politics The history of minority governments. Who could lead the Tories? The end of austerity? Lessons from Labour s revival.

29 28. Conclusions The euro-zone is experiencing a sweet spot. The position of Italy remains perilous. Will the EU survive? The UK and the City will weather Brexit well. A trade deal with the EU is unlikely. The UK may well go for unilateral free trade. Difficult to deliver Conservative government.

30 The Economic and Political Outlook By Roger Bootle